Quarterly Market Update - Q1 2018 By: Gabriel PotterMBA, AIFA® 2018.04.09

Key news stories

Investors might have thought that the government shutdown in January might have had a material impact, but they would have been wrong.  The short lived shutdown will go down as a mere footnote.  Instead, the greatest trading action over the past few weeks have centered around two key themes.  First, there was profit taking and general retreat on the key technology stocks – the FAANGs – particularly Facebook following data privacy scandals.  The second theme was the potential for a trade war caused by the administrations embrace of protectionist tariffs.

Equities

We wrote in a January blog-post, “The lonely pessimist on Wall Street” that the market fundamentals were strong, and likely to be supported by enhanced earnings, following the tax cut package passed in December 2017.  However, we also noted the concerns of bond trader Jeffrey Gundlach, who agreed that the economy was intrinsically healthy but the prices investors were willing to pay had exceeded reasonable valuations.  On the plus side, some of that valuation excess has been taken out by the intra-quarter correction.  In other news, rising interest rates particularly hurt the income & dividend driven value sectors like utilities and telecomm stocks.

INDEX

1Q 2018

YTD 2018

US Large Cap Growth - Russell 1000 Growth

1.42%

1.42%

US Large Cap Value - Russell 1000 Value

-2.83%

-2.83%

US Small Cap Growth - Russell 2000 Growth

2.30%

2.30%

US Small Cap Value - Russell 2000 Value

-2.64%

2.64%

Developed International Markets - MSCI EAFE

-1.53%

-1.53%

Emerging Markets - MSCI EM

1.42%

1.42%


Bonds

In quarters past, an increase in the federal fund rate equated to a flattening yield curve, with the short end dutifully moving up but long term yields hovering near to where they were.  For once, during the first quarter of 2018, interest-rate and duration risk seemed to be in alignment over the quarter.  The ten-year yields have jumped about 40 basis points (from approximately 2.4% to 2.8%) in 1Q and the long duration bonds, most sensitive to interest rate increases, were the losers in the fixed income category.  On the plus side, US dollar weakness boosted international bonds into positive territory while credit-like instruments, like high yield bonds, outperformed.

INDEX

1Q 2018

YTD 2018

Barclays Capital US Aggregate Bond

-1.46%

-1.46%

Barclays Capital US Intermediate Credit

-1.36%

-1.36%

Barclays Capital US Government

-1.15%

-1.15%

Barclays Capital US Gov’t/Credit Long Duration

-3.58%

-3.58%

ICE B. of America/Merrill Lynch High Yield

-0.91%

-0.91%

Citi World Government Bond Index (non USD)

4.42%

4.42%


Alternatives

Again, rising interest rates hurt the income driven sectors; in regards to alternative asset classes, this means pass-through securities – Real Estate – particularly underperformed.  Strength in commodities and a weak dollar were both correlated to outperformance from emerging markets, noted in the first table.  Exotic strategies had time to shine in 1Q as well.  Macro strategies, which are often driven by broad market directions suffered relatively while market neutral, and event driven strategies outperformed. 

INDEX

1Q 2018

YTD 2018

Real Estate - FTSE NAREIT All REITs TR

-6.66%

-6.66%

Commodities - Morningstar Long Only Commodity TR

1.42%

1.42%

Inflation - Barclays US Treasury TIPS

-0.79%

-0.79%

Hedge - Morningstar Broad Bank Hedge Fund TR USD

2.58%

2.58%

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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